Developments in Delaware: poison pill upheld

Readers may find this decision of the Delaware Court of Chancery, Air Products v. Airgas (judgment dated 15^th February, 2011) interesting. The Court has discussed in detail the (Delaware) law on the legality of the ‘poison pill’. The Court summarised its ruling thus:

“This case poses the following fundamental question: Can a board of directors, acting in good faith and with a reasonable factual basis for its decision, when faced with a structurally non-coercive, all-cash, fully financed tender offer directed to the stockholders of the corporation, keep a poison pill in place so as to prevent the stockholders from making their own decision about whether they want to tender their shares—even after the incumbent board has lost one election contest, a full year has gone by since the offer was first made public, and the stockholders are fully informed as to the target board’s views on the inadequacy of the offer? If so, does that effectively mean that a board can just say never to a hostile tender offer? The answer to the latter question is “no.” A board cannot “just say no” to a tender offer. Under Delaware law, it must first pass through two prongs of exacting judicial scrutiny by a judge who will evaluate the actions taken by, and the motives of, the board. Only a board of directors found to be acting in good faith, after reasonable investigation and reliance on the advice of outside advisors, which articulates and convinces the Court that a hostile tender offer poses a legitimate threat to the corporate enterprise, may address that perceived threat by blocking the tender offer and forcing the bidder to elect a board majority that supports its bid…”

The Court applied the Unocal standard of review, but held on the facts of the case that the target board had satisfied that standard. The Unocal standard requires (a) that the target board must “articulate a legally cognizable threat”, and (b) that the proposed action in response of that threat must be reasonable. This might seem a somewhat heavy burden, but the burden is to some extent mitigated because factor (a) can be satisfied by demonstrating good faith and reasonable investigation. Thus, the Court’s review on factor (a) is a process-based review. On the other hand, insofar as factor (b) is concerned, the Court’s review of the target board’s actions does not stop with looking at the process followed, but is actually a substance-based review. In other words, the correctness of not only the procedure but also the outcome would have to be determined. To this extent, the standard is stricter than the traditional business-judgment rule otherwise followed.

A discussion can be found on the Delaware Corporate and Commercial Litigation blog here and on the Wall Street Journal Law blog here.